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INDIA DAILY EQUITY MARKETS

India Daily Summary - June 25, 2008 June 25, 2008
Change, %
India 24-Jun 1-day 1-mo 3-mo
Sensex 14,107 (1.3) (15.3) (13.0)
Nifty 4,191 (1.8) (15.3) (14.1)

Contents Global/Regional indices

Dow Jones 11,807 (0.3) (5.4) (5.8)
Results Nasdaq Composite 2,368 (0.7) (3.1) 1.2
Jet Airways: Higher-than-expected losses due to increased fuel costs; no respite FTSE 5,635 (0.6) (7.4) (1.0)

in sight, cut rating to SELL from REDUCE Nikkie 13,645 (1.5) (2.6) 7.1
Hang Seng 22,456 (1.1) (9.1) (0.0)
United Breweries: Margin expansion in a difficult year but rich valuations do not KOSPI 1,698 (0.7) (7.1) 1.4
offer upsides Value traded - India

PSL: 4QFY08 results below estimates; revise estimates for recent order flow; Moving avg, Rs bn
24-Jun 1-mo 3-mo
maintain BUY
Cash (NSE+BSE) 171.0 192.2 195.3
Derivatives (NSE) 702.5 413.2 423
Change in recommendations Deri. open interest 838.4 833 632
Hindalco: Rights issue to fund Novelis acquisition; balance funding may prove
costly—cut target price to Rs150; lower rating to REDUCE

Forex/money market
Updates
Change, basis points
Economy: Growth to trim on RBI's strong signal; but inflation is destined to stay 24-Jun 1-day 1-mo 3-mo
high Rs/US$ 42.8 0 12 277
6mo fwd prem, % 0.7 (25) 71 24
Cement: Crude oil linked inflation woes to impact profitability of cement
10yr govt bond, % 8.6 (2) 47 86
companies
Net investment (US$mn)

23-Jun MTD CYTD

FIIs (154) (1,382) (5,255)
News Roundup
MFs 9 134 1,660

Corporate Top movers -3mo basis

• The GMR Group is close to yet another big-ticket cross-border acquisition. The Change, %

company is likely to buy a 50% stake in US-based power generator InterGen in Best performers 24-Jun 1-day 1-mo 3-mo

a deal valued at $1.2 bn. (ET) Chambal Fert 75 (3.4) (1.2) 48.3
i-Flex 1,248 0.3 (13.4) 25.7
• Suzlon Energy is partnering Bahrain-headquartered private equity firm Arcapita Infosys 1,794 (2.8) (1.9) 20.2
to explore a bid for Chinese alternative energy company, Honiton Energy GESCO 404 2.7 (19.1) 16.6
Holdings, estimated at around $400 mn. (ET) Ranbaxy 525 2.3 5.7 16.4

• Anil Ambani-owned Reliance Big Entertainment has inked a joint venture with Worst performers

India’s first family of entertainment—the Bachchans. The JV will focus on Siemens India 415 (5.3) (29.5) (38.6)

creating intellectual property across all entertainment platforms including BPCL 264 (0.7) (26.6) (35.2)

movies, television content, live shows, mobile and online content. (ET) SBI 1,207 0.2 (23.3) (30.6)
BHEL 1,398 2.9 (19.9) (30.5)
• SpiceJet plans to sell around 11.5 mn shares, about 5% of its equity capital, on BoB 210 (0.9) (26.3) (29.6)
the stock markets following a settlement with the S.K. Modi business group.
(Mint)
• Essar Shipping Ports & Logistics is planning to set up ports in Brazil, China and
Vietnam to provide integrated support for its steel and power generation
business there. (ET)
• The Tata group has increased stake in its South African telecom venture, Neotel,
by 30%, thereby taking the total equity in the communications company to
56%. (ET)

Economic and political

• Led by the record increase in benchmark iron ore prices, steel rates are set to
climb steeply from August, immediately after the three-month period during
which steel producers had promised the government to hold prices, gets over.
(BS)
Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line.
Kotak Institutional Equities Research
kotak.research@kotak.com

Kotak Institutional Equities Research Mumbai: +91-22-6634-1100 1

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END
OF THIS MATERIAL, GO TO HEDGES AT http://www.kotaksecurities.com.
 India Daily Summary - June 25, 2008

Transportation Jet Airways: Higher-than-expected losses due to increased fuel costs;

no respite in sight, cut rating to SELL from REDUCE
JET.BO, Rs518
Rating SELL
Lokesh Garg : lokesh.garg@kotak.com, +91-22-6634-1496
Sector coverage view Neutral
Target Price (Rs) 450
Sandip Bansal : sandip.bansal@kotak.com, +91-22-6749-3327
52W High -Low (Rs) 1050 - 460 • Higher-than-expected losses due to increased fuel costs and low international seat
Market Cap (Rs bn) 44.7 factors
• Outlook remains bleak with continued strength in fuel prices, domestic overcapacity
Financials
and start-up nature of international operations
March y/e 2008 2009E 2010E
Sales (Rs bn) 88.1 137.5 174.5 • Jet Lite's FY2008 performance improves over a low base; turnaround to test
Net Profit (Rs bn) (6.6) (10.6) 8.3 management's execution skills
EPS (Rs) (76.5) (123.3) 96.4
• Cut target price to Rs450; and rating to SELL from REDUCE earlier
EPS gth - - -
P/E (x) (6.8) (4.2) 5.4 Jet Airways reported 4QFY08 revenues of Rs27.6 bn (up 40% yoy) and losses (before
EV/EBITDA (x) 60.1 17.7 6.3 taxes and extraordinary items) of Rs2.9 bn (PBT of Rs1.2 bn in 4QFY07) versus our
Div yield (%) - - 1.3 expectation of revenues of Rs24.7 bn and losses of Rs2.2 bn. EBITDAR margin declined
to 10% from 23% a year ago, led by (1) significantly higher fuel costs, (2) fall in
international seat factors, and (3) increase in other expenses. The outlook remains
Shareholding, March 2008 bleak in our view with continued strength in fuel prices, domestic overcapacity and
% of Over/(under) start-up nature of international operations. Though Jet Lite's performance has improved
Pattern Portfolio weight in FY2008 from low base of FY2007, restoration of profitability would still be long
Promoters 80.0 - - drawn affair in the current industry environment. We cut our target price to Rs450
FIIs 10.1 0.1 (0.1) (from Rs800 earlier) and our rating to SELL from REDUCE earlier.
MFs 2.7 0.1 (0.0)
UTI - - (0.1) Higher-than-expected losses due to increased fuel costs and low international
LIC 2.7 0.1 (0.0)
seat factors
Jet Airways reported 4QFY08 revenues of Rs27.6 bn (up 40% yoy) and losses (before
taxes and extraordinary items) of Rs2.9 bn (PBT of Rs1.2 bn in 4QFY07) versus our
expectation of revenues of Rs24.7 bn and losses of Rs2.2 bn. Including losses of
(1) Rs690 mn on derivatives contracts and (2) Rs110 mn on restatement in accordance
with AS11, Jet has reported a loss of Rs2.2 bn after accounting for a tax benefit of
Rs1.5 bn. EBITDAR margin has declined to 10% from 23% a year ago (and 12% last
quarter), led by (1) significantly higher fuel costs - up 11% yoy (as a % of sales),
(2) fall in international seat factors to 69% from 76.6% a year ago (EBITDAR margin
was 1.6% in the quarter compared to 20.5% a year ago), and (3) increase in other
expenses. Profitability was impacted by the high fuel prices (as Jet was not able to pass
on the entire impact to customers) inspite of the fact that fuel surcharges were levied
on both the domestic and international segments - yields increased in both segments in
4QFY08 on both yoy as well as qoq basis. Fleet expansion (ASKMs in the international
segment increased by 177% on a yoy basis and 36% on a qoq basis) led to
(1) increase in depreciation costs by 107% yoy (delivery of six new aircrafts in the
quarter) and (2) increase in interest costs by 192% yoy. For the full year FY2008, Jet
has reported losses (before taxes and extraordinary items) of Rs8.2 bn and PAT at a
negative of Rs1.8 bn (versus a positive of Rs279 mn in FY2007, Exhibits 1-3).

2 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

Outlook remains bleak with continued strength in fuel prices, domestic

overcapacity and start-up nature of international operations
Traffic growth in the domestic market is slowing down as a result of increased airfares
(led by fuel surcharges) and is likely to be impacted further with the recent round of
fare hikes. Yields will likely remain under pressure due strong competition led by over
capacity in the domestic market. We expect the domestic market environment to
remain challenging in FY2009E. In the international segment too we expect Jet's
profitability to continue to remain under pressure as it incurs start-up costs on new
routes. We highlight that Jet has launched flights on several Gulf routes in 4QFY08 like
Kuwait-Delhi/Kochi, Bahrain-Mumbai/Kochi, Muscat-Kozhikode/Kochi and Doha-
Mumbai/Kozhikode apart from launching HongKong-Mumbai, Mumbai-Bangkok,
Mumbai-San Francisco in 1QFY09.

Jet Lite's FY2008 performance improves over a low base; turnaround to test
management's execution skills
Jet Lite's performance in FY2008 has improved on a yoy basis from a low base of
FY2007 with - (1) losses of Rs4.4 bn in FY2008 versus Rs6.9 bn in FY2007, (2) Negative
EBITDAR margin of 10% (versus negative of 14% in FY07), (3) Cost per ASKM of Rs
3.2 inspite of higher oil prices (versus Rs4.3 in FY07), (4) Seat factors of 71% (versus
68% in FY07). However, we expect Jet Lite to continue to face several challenges that
will likely impede its turnaround such as (1) establishment of the business model as a
value carrier, (2) substantial costs and investments for overhaul of aircrafts including
repairs, reconfiguration and rebranding, (3) lack of full synergies with Jet due to
different business models, (4) continued challenging environment in the domestic
sector with impending capacity additions and high fuel prices, (5) start-up costs for
international operations. We highlight that the networth of Jet Lite has been
completely eroded by the accumulated losses and would require continued fund
infusion by Jet.

Cut target price to Rs450; and rating to SELL from REDUCE earlier
We cut our target price to Rs450 (from Rs800). Our target price is based on 6X EV/
EBITDAR multiple applied on our estimated consolidated (Jet Airways and Jet Lite)
FY2010E EBITDAR. The revision in our target price is primarily led by higher fuel prices
as well as revision in yields and seat factor assumptions. Our estimates now factor in
domestic ATF prices at about Rs55 per litre in FY2009E (corresponding to average
crude price of about USD110/barrel) and Rs49 per litre (corresponding to average
crude price of about USD95/barrel) in FY2010E. We note that prevailing prices are
higher than these levels and thus our estimates could have further downside. We
highlight that we have benign assumptions for FY2010E with (1) overall seat factors of
about 75% (versus about 69% in FY2008), (2) less than 1% fall in domestic yields
inspite of 10% decrease in fuel prices in FY2010E over FY2009E levels and (3) minimal
increases in unit cost parameters, resulting in an EBITDAR margin of about 20%
(versus about 9% in FY2008). We cut our rating to SELL from REDUCE earlier based on
the continued challenges highlighted above. We highlight that Jet has a Debt-Equity
ratio of about 2.5X at FY2008-end (that includes Jet Lite investment at Rs14.7 bn and
revaluation reserves of about Rs27 bn (added in FY2008-end post revaluation of
narrow-bodied aircraft and leasehold land by international experts/land valuers based
on market value/replacement cost)). Adjusting for only the revaluation reserves, the
debt-equity ratio is above 6X though we highlight that portion of revaluation is justified
as Jet has been depreciating its narrow-bodied aircraft at a higher rate versus
economic rate of depreciation. We believe that the company would have to soon
finalize its capital raising plans to fund its aggressive growth plans (especially in the
international segment), especially given the fact that losses are likely to continue in
FY2009E in our view worsening the balance sheet position further.

Kotak Institutional Equities Research 3

 India Daily Summary - June 25, 2008

Exhibit 1: Weak performance led by high fuel costs

Jet Airways - 4QFY08 - key numbers
yoy qoq yoy
4QFY08 4QFY07 % change 4QFY08 3QFY08 % change FY2008 FY2007 % change
Revenues 27,599 19,783 39.5 27,599 24,260 13.8 88,111 70,578 24.8
Operating expenses (24,787) (15,184) 63.2 (24,787) (21,353) 16.1 (79,913) (60,499) 32.1
Employee costs (3,528) (2,583) 36.6 (3,528) (3,027) 16.5 (12,052) (9,381) 28.5
Fuel (10,802) (5,511) 96.0 (10,802) (9,173) 17.8 (32,930) (24,276) 35.6
Commission (2,072) (1,585) 30.7 (2,072) (1,602) 29.3 (6,467) (5,589) 15.7
S&D exps (690) (777) (11.3) (690) (1,020) (32.4) (3,362) (2,420) 38.9
Other op exps (7,696) (4,729) 62.8 (7,696) (6,531) 17.8 (25,102) (18,833) 33.3
EBIDTAR 2,812 4,599 (38.9) 2,812 2,907 (3.3) 8,198 10,079 (18.7)
lease rentals (1,483) (1,752) (15.4) (1,483) (1,365) 8.7 (5,633) (6,458) (12.8)
EBIDTA 1,329 2,846 (53.3) 1,329 1,542 (13.8) 2,566 3,621 (29.1)
Other income (218) 108 (218) 519 (142.0) 1,248 3,435 (63.7)
Depreciation (2,503) (1,210) 106.9 (2,503) (2,204) 13.6 (7,778) (4,141) 87.8
EBIT (1,392) 1,744 (179.8) (1,392) (143) 875.5 (3,964) 2,915
Interest (1,549) (530) 192.3 (1,549) (1,554) (0.3) (4,928) (2,402) 105.2
EBT (2,941) 1,214 (342.2) (2,941) (1,697) (73.3) (8,892) 514
Tax 1,530 (334) (557.7) 1,530 393 289.7 1,595 (234)
PAT (1,411) 880 (260.3) (1,411) (1,304) (8.2) (7,297) 279
Extraordinary item (801) - (801) 393 303.7 4,766 -
Reported PAT (2,212) 880 (2,212) (911) (142.7) (2,531) 279

Key ratios
% of revenues
Employee costs 12.8 13.1 12.8 12.5 13.7 13.3
Fuel costs 39.1 27.9 39.1 37.8 37.4 34.4
Commission 7.5 8.0 7.5 6.6 7.3 7.9
S&D 2.5 3.9 2.5 4.2 3.8 3.4
Others 27.9 23.9 27.9 26.9 28.5 26.7
EBIDTAR margin 10.2 23.2 10.2 12.0 9.3 14.3
EBIDTA margin 4.8 14.4 4.8 6.4 2.9 5.1
EBIT margin (5.0) 8.8 (5.0) (0.6) (4.5) 4.1
PBT margin (10.7) 6.1 (10.7) (7.0) (10.1) 0.7

Source: Company data, Kotak Institutional Equities estimates.

Exhibit 2: Sharp decline in seat factors in international segment in 4QFY08 on a yoy basis
Jet Airways - key operating statistics

yoy qoq yoy

4QFY08 4QFY07 (% chg) 4QFY08 3QFY08 (% chg) FY2008 FY2007 (% chg)
ASK (mn) 7,684 4,679 64.2 7,684 6,586 16.7 24,446 17,700 38.1
Domestic 2,997 2,985 0.4 2,997 3,040 (1.4) 12,073 12,156 (0.7)
International 4,687 1,694 176.7 4,687 3,456 35.6 12,284 5,543 121.6
RPK (mn) 5,452 3,396 60.5 5,452 4,554 19.7 16,914 12,307 37.4
Domestic 2,218 2,098 5.7 2,218 2,198 0.9 8,565 8,537 0.3
International 3,234 1,298 149.2 3,234 2,356 37.3 8,349 3,770 121.5
Seat factor (%) 71.0 72.6 71.0 69.1 69.2 69.5
Domestic 74.0 70.3 74.0 72.3 70.9 70.2
International 69.0 76.6 69.0 68.2 68.0 68.0
Yield (Rs/RPK) 5.1 5.3 (4.9) 5.1 4.9 3.8 4.9 5.3 (6.6)
Domestic 7.2 6.8 6.2 7.2 6.5 11.1 6.4 6.4 (0.7)
International 3.6 3.0 21.2 3.6 3.4 6.5 3.4 3.0 13.2

Source: Company data, Kotak Institutional Equities estimates.

4 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

Exhibit 3: International segment profitability falls with decline in seat factors

Jet Airways—Segment-wise details

yoy qoq yoy

4QFY08 4QFY07 (% chg) 4QFY08 3QFY08 (% chg) FY2008 FY2007 (% chg)
Domestic
Revenue 16,001 15,094 6.0 16,001 15,397 3.9 57,632 57,004 1.1
EBITDAR 2,627 3,639 (27.8) 2,627 1,984 32.4 6,608 9,096 (27.4)
EBITDAR margin 16.4 24.1 16.4 12.9 11.5 16.0
PBT (1,109) 1,184 (193.7) (1,109) (145) 1,664 2,421 (31.3)
International
Revenue 11,598 4,689 147.3 11,598 8,863 30.9 30,480 13,574 124.5
EBITDAR 186 961 (80.6) 186 922 (79.8) 1,591 984 61.7
EBITDAR margin 1.6 20.5 1.6 10.4 5.2 7.2
PBT (2,632) 68 (3,970.6) (2,632) (1,159) (127.1) (5,790) (1,867) (210.1)

Source: Company data, Kotak Institutional Equities estimates.

Kotak Institutional Equities Research 5

 India Daily Summary - June 25, 2008

Beverages United Breweries: Margin expansion in a difficult year but rich

valuations do not offer upsides
UBBW.BO, Rs150
Rating REDUCE
Ravi Agrawal : ravi.agrawal@kotak.com, +91-22-66341348
Sector coverage view Attractive
Target Price (Rs) 160 • 4QFY08 profits higher than expected due to lower fixed costs, but input cost
52W High -Low (Rs) 413 - 147 pressures remain
Market Cap (Rs bn) 36.1
• JV operations as per expectations, awaiting more clarity post Heineken acquisition
of S&N stake
Financials
March y/e 2008 2009E 2010E • Lower target price to Rs 160 (Rs 169 earlier) and maintain REDUCE rating
Sales (Rs bn) 15.6 18.8 23.2
Net Profit (Rs bn) 0.5 0.7 1.1 UBBL reported 4QFY08 revenues of Rs3.84 bn, in line with our expectation of
EPS (Rs) 1.9 2.4 4.4 Rs3.86 bn. EBITDA margins at 13.3% were higher than our expectations of 10.5%.
EPS gth (11.6) 25.7 82.1 PAT at Rs196 mn (up 67% yoy ) was higher than expectation of Rs130 mn lead by
P/E (x) 78.9 62.8 34.5 (1) staff costs which were 11% lower than expectations and (2) savings on operating
EV/EBITDA (x) 19.4 15.1 11.4 fixed costs which were Rs226 mn versus our expectation of Rs298 mn. We revise
Div yield (%) - - - upwards our FY2009E and FY2010E earnings by 0.8% and 4.4%, respectively, to
Rs659 mn and Rs1.13 bn, adjusting for recent rights issue and higher interest cost
assumptions and maintain our REDUCE rating.
Shareholding, March 2008
% of Over/(under) 4QFY08 profits higher than expected due to lower fixed costs, but input cost
Pattern Portfolio weight pressures remain
Promoters 75.0 - -
UBBL reported 4QFY08 revenues of Rs3.84 bn, in line with our expectation of
FIIs 16.3 0.1 (0.0)
Rs3.86 bn. EBITDA margins at 13.3% were higher than our expectations of 10.5%
MFs 0.3 0.0 (0.1)
aided by (1) lower staff costs, at Rs213 mn (10% qoq growth and 11% lower than
UTI - - (0.1)
expectation) and (2) fixed costs which were 24% lower than expectations. PAT at
LIC 1.1 0.0 (0.1)
Rs196 mn (up 67% yoy ) was higher than expectation of Rs130 mn.

For the year, standalone net sales grew 29% yoy to Rs13.4 bn. EBITDA at Rs1.97 bn
(22% yoy growth) was 8% higher than expectations while PAT was flat at Rs625 mn
on account of higher interest and depreciation costs.

JV operations as per expectations, awaiting more clarity post Heineken

acquisition of S&N stake
Consolidated FY2008 sales, at Rs15.6 bn (29% yoy growth), were marginally higher
than our estimates of Rs15.3 bn, aided by higher sales in the Millenium Alcobev
(MAPL) JV. EBITDA grew 25% yoy to Rs2.15 bn while PAT was flat at Rs543 mn.

We await more clarity on operations of MAPL, given UBL’s concerns on Heineken’s

acquisition of Scottish & Newcastle’s India’s operations. Management has indicated
that, while it has no issues with Heineken as a local partner, it would like clarity on
Heineken’s previous arrangements in the country.

Earnings revisions
Revised earnings estimates to factor in 4QFY08 results and recent rights issue.
As shown in Exhibit 3, we revise our earnings estimates marginally 0.8% and 4.4% in
FY2009E and FY2010E, respectively. We highlight the following in our revised
estimates:
1. Incorporate capital infusion due to recent rights issue. We include the recently
placed rights issue of Rs 4.24 bn in our estimates. This leads to an equity dilution of
around 11%. We subsequently also marginally increase our capex estimates for
FY2009-10E by Rs500 mn based on clarity on utilization of rights proceeds.

6 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

2. Maintain our volume and price assumptions. We maintain our volume growth
assumptions of 12% and 13% for FY2009E and FY2010E, respectively. We also
maintain our price growth assumptions of 7%. We highlight that our volume growth
assumptions could be conservative, given the low per capita consumption of beer in
the country.
3. Increase our interest cost assumptions. We increase our average cost of debt
assumptions to around 11-11.5% per annum, given the recent hardening of interest
rates.

Valuations have historically been rich

We revise our target price to Rs160 (Rs169 earlier), based on 16X FY2009 EV/EBITDA
(18X earlier) and maintain our REDUCE rating. We highlight that UBL’s valuations have
historically been very rich, with investors more focused on growth potential of the beer
category in the country and UBL’s market share of around 50%. Key upside risk
remains potential excise rationalization in the sector while further downside risks could
come from higher-than-anticipated rise in barley prices.

UB Ltd interim results, March fiscal year-ends (Rs mn)

yoy qoq yoy

4Q2008 4Q2007 % chg. 4Q2008 3Q2008 % chg. 2008 2007 % yoy
Net sales 3835 3885 (1) 3835 3014 27 13408 10428 29
COGS (1833) (2082) (12) (1833) (1407) 30 (6383) (4753) 34
Power & fuel (154) (222) (31) (154) (134) 15 (558) (496) 12
Staff costs (213) (250) (15) (213) (193) 10 (774) (668) 16
Advertising & sales promotion (899) (804) 12 (899) (893) 1 (3239) (2508) 29
Other expenditure (226) (212) 7 (226) (165) 37 (737) (599) 23
Total (3325) (3569) (7) (3325) (2792) 19 (11691) (9024) 30
EBITDA 510 315 62 510 222 130 1717 1404 22
EBITDA Margin (% to sales) 13.3 8.1 13.3 7.4 12.8 13.5 (5)
Interest (net) (146) (105) 39 (146) (92) 58 (428) (280) 53
Depreciation (187) (225) (17) (187) (165) 13 (612) (385) 59
Other income 68 115 (41) 68 50 38 256 211 21
Profit before tax 246 100 146 246 14 1631 932 950 (2)
Total tax (50) 17 (396) (50) (7) 585 (307) (299) 3
PAT 196 117 67 196 7 NA 625 651 (4)
Tax/PBT (%) 20 (17) 20 51 33 31

% to net sales
COGS 47.8 53.6 47.8 46.7 47.6 45.6
Power & Fuel 4.0 5.7 4.0 4.4 4.2 4.8
Staff costs 5.6 6.4 5.6 6.4 5.8 6.4
SG&A 23.4 20.7 23.4 29.6 24.2 24.1
Other expenditure 5.9 5.4 5.9 5.5 5.5 5.7

Source: Company, Kotak Instituitonal Equities estimates

Kotak Institutional Equities Research 7

 India Daily Summary - June 25, 2008

JV profits were in line with estimates

Consolidated JV
2007 2008E 2008A % chng. 2007 2008E 2008A % chng.
Sales 12,058 15,305 15,608 2.0 1,630 1,869 2,200 17.7
EBITDA 1,721 1,933 2,156 11.5 106 111 183 65.1
PAT 550 477 543 13.8 (101) (82) (82) (0.0)

Source: Company, Kotak Instituitonal Equities estimates

Change in estimates, March fiscal year-ends, (Rs mn)

New Old % change
2009E 2010E 2009E 2010E 2009E 2010E
Sales 18,763 23,202 18,763 23,202 0.0 0.0
EBITDA 2,493 3,281 2,356 3,131 5.8 4.8
EBITDA margin (%) 13.3 14.1 12.6 13.5
PAT 659 1,131 654 1,084 0.8 4.4
EPS (diluted) 2.4 4.4 2.6 4.6 (9.1) (5.7)

Note:
(1) EPS reduction is on account of 11% dilution due to rights issue.

Source: Kotak Instituitonal Equities estimates

We reduce our target price to Rs160 from Rs169 earlier

United Breweries Ltd (UBL)

EBITDA 2,493 16 39,892
Less Net Debt 1,620
Equity value 38,272
Per share price (Rs) 159

Source: Kotak Instituitonal Equities estimates

Strong beer sales is expected to contribute 71% of total sales growth between FY2008-10E
Total volume assumptions, March fiscal year-ends (mn cases)

100 Total Strong Mild

80

60

40

20

0
2006 2007 2008E 2009E 2010E

Source: Kotak Instituitonal Equities estimates

8 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

UBL will spend around Rs3.7 bn to increase capacity by 40%

Total projected use of rights proceeds
Amount Quantity Expected
Objective (Rs mn) (mn HL) commencement date
Setting up of greenfield project 1,407 0.80 Apr-09
Capacity expansion of existing facilities 2,311 1.48
Phase I 1,545 0.73 Apr-09
Phase II 766 0.75 Apr-10
Total 3,718 2.28
Current capacity 5.98
Total proposed capacity 8.25

Source: Company

United Breweries: Profit model, balance sheet, cash model, March fiscal year-ends, 2004-10E, (Rs mn)

2004 2005 2006 2007 2008E 2009E 2010E

Profit Model (Rs mn)
Total income (inc. other op. income) 5,133 6,067 8,194 12,257 15,906 19,059 23,498
EBITDA 466 572 1,349 1,694 2,156 2,493 3,281
EBITDA margin (%) 9.1 9.4 16.5 13.8 13.6 13.1 14.0
Depreciation (142) (182) (349) (474) (731) (908) (1,065)
Other Income (inc. extraordinaries) (32) (60) (340) — — — —
EBIT 291 329 660 1,220 1,425 1,585 2,216
Net finance cost (429) (257) (342) (370) (576) (524) (457)
Profit before tax (138) 72 319 850 849 1,061 1,759
Tax (15) (119) (427) (301) (307) (402) (628)
Adjusted net profit (123) (45) (108) 550 542 659 1,131
Diluted EPS (Rs) (0.6) (0.4) (0.9) 2.2 1.9 2.4 4.4
Balance Sheet (Rs mn)
Total Equity 237 2,199 4,934 5,337 5,735 10,488 11,424
Deferred tax liability 29 131 107 65 65 122 212
Total borrowings 4,937 3,732 4,033 6,262 5,862 5,262 4,662
Current liabilites & provisions 1,944 1,762 2,013 2,662 4,045 4,848 5,836
Total Liabilities and equity 7,147 7,824 11,088 14,325 15,707 20,720 22,133
Cash 204 205 1,341 1,471 159 3,641 3,308
Current assets excl. cash 4,199 4,542 5,781 5,760 6,783 7,572 8,732
Total net fixed assets 1,836 1,870 2,775 5,912 7,306 8,048 8,633
Investments 17 20 8 0 277 277 277
Goodwill on consolidation 891 1,187 1,182 1,182 1,182 1,182 1,182
Total assets 7,147 7,824 11,088 14,325 15,707 20,720 22,133
Free cash flow (Rs mn)
Operating cash flow, excl. working capital 106 338 (329) 1,016 1,273 1,625 2,286
Working capital (324) (562) (498) (679) 909 14 (173)
Capital expenditure (337) (131) (1,828) (3,600) (2,125) (1,650) (1,650)
Free cash flow (555) (356) (2,655) (3,263) 57 (11) 463

Source: Company, Kotak Instituitonal Equities estimates

Kotak Institutional Equities Research 9

 India Daily Summary - June 25, 2008

Pipes PSL: 4QFY08 results below estimates; revise estimates for recent
order flow; maintain BUY
PSLH.BO, Rs352
Rating BUY
Nitin Bhasin : nitin.bhasin@kotak.com, +91-22-6634-1395
Sector coverage view Attractive
Target Price (Rs) 500
Augustya Somani : augustya.somani@kotak.com, +91-22-6634-1328
52W High -Low (Rs) 610 - 252
• 4QFY08 results—revenues and PAT below estimates due to lower EBITDA margin
Market Cap (Rs bn) 15.3
• Revise FY2009E and FY2010E earnings estimates upwards by 19% and 26% for
Financials higher volumes and better realizations
March y/e 2008 2009E 2010E
• Revise volume assumptions for recent order flows and pricing assumptions in line
Sales (Rs bn) 21.2 38.7 49.5
with current market trends
Net Profit (Rs bn) 0.8 2.0 2.9
EPS (Rs) 22.0 46.3 66.8 • Maintain target price at Rs500 and BUY rating; increase WACC assumption to 13%
EPS gth 8.5 110.8 44.2
P/E (x) 16.0 8 5.3 PSL's 4QFY08 results were below expectations—net revenues for the quarter was at
EV/EBITDA (x) 9.4 5.6 3.8 Rs6.2 bn versus estimated Rs7 bn and PAT was Rs183 mn versus estimated Rs408 mn
Div yield (%) 1.4 1.7 2.0 due to lower-than-estimated EBITDA margins. Adjusted EBITDA margin for the quarter
was 7.8% versus 8.4% in 3QFY08. Net revenues increased 63.4% yoy led by strong
growth in volumes at 154,944 tons in 4QFY08 versus 28,640 tons in 4QFY07. However,
Shareholding, March 2008 average realization (excluding coating) was significantly lower at US$724/ton against
% of Over/(under) US$1,043/ton in 4QFY07. Net income increased 42% yoy to Rs183 mn in 4QFY08 from
Pattern Portfolio weight Rs130 mn in 4QFY07. We revise our revenue estimates upwards by 26.4% and 29.3%
Promoters 48.4 - - and PAT estimates upwards by 18.9% and 25.8% for FY2009E and FY2010E,
FIIs 17.4 0.0 0.0 respectively. We revise our domestic volume assumptions for FY2009E upwards by
MFs 14.4 0.1 0.1 12.5% and USA volume assumption for FY2010E upwards by 57% based on current
UTI - - - order book. We revise our WACC estimate to 13% from 12.5% to account for higher
LIC - - - cost of equity. We maintain our DCF-based target price of Rs500 and BUY rating.

4QFY08 results—revenues and PAT lower-than-expected

PSL’s 4QFY08 results were below estimates with net revenues at Rs6.2 bn versus
estimated Rs7 bn and PAT of Rs183 mn versus estimated Rs408 mn. Net revenues
during quarter were higher by 63% yoy to Rs6.5 bn from Rs4 bn in 4QFY07 and were
flat qoq. PAT for the quarter at Rs183 mn was up 42% yoy from Rs130 mn in 4QFY07
and lower by 40% qoq from Rs302 mn in 3QFY07. EBITDA margin for the quarter was
lower at 7.8% against 8.4% in 3QFY08 mainly on account of higher other expenditure
(up 34% qoq). Pipe volumes grew 18% qoq; however due to lower realization
revenues were flat. Tax provision during the quarter was also higher at Rs143 mn
versus Rs 113 mn in 3QFY08 on account of year-end provisioning. For the full year
revenues and PAT grew by 39% and 30%, respectively supported by 76% growth in
volumes (see Exhibit 2).

Revise estimates—increase revenues and PAT estimates for higher volumes and
realisations
We increase our revenue estimates for FY2009E and FY2010E by 26.4% and 29.3%
based on higher volume and price assumptions. We increase our pipe volumes
assumptions for India operations by 12.5% for FY2009E and for USA operations by
57% for FY2010E based on outstanding order book. We reduce our EBITDA margin
assumptions for FY2009E and FY2010E to 10.1%, 10.4%, respectively, from earlier
estimates of 11.1%, 11.2%, respectively, on account of higher raw material and
freight costs. We increase our pipe price assumptions upwards by 13% for India
operations and 28% for USA operations based on recent order bookings. We increase
our coil price assumptions upwards by 16% and 20% for FY2009E and FY2010E,
respectively. We increase our net income estimates for FY2009E and FY2010E by 19%
and 26%, respectively, led by higher revenue estimates and adjusted for lower margins
assumptions.

10 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

Strong order flow increases revenue visibility; outstanding order book

of Rs62 bn
We note that strong order book of Rs62 bn significantly increases near-term visibility
and provides support to our FY2009E and FY2010E revenue estimates. PSL recently
won several large orders at high realizations both in the domestic and the international
market resulting in large outstanding order book (see Exhibit 5). Management guides
for an improved capacity utilisation in FY2009E with volumes in excess of 500,000 tons
and order execution of about Rs42 bn. Domestic order book currently outstanding is
around Rs44 bn, most of which is expected to be competed by FY2009E. The USA
order from Florida Gas Transmission Company will largely be executed in FY2010E.

International facilities—USA moving on track; considering capacity expansion

at UAE plant
The 300,000 mtpa USA plant is expected to be commissioned in Q2FY09.
Management expects to receive API approval within two months of commissioning
and expects commercial production to begin in early CY2009. The 75,000 mtpa UAE
plant is fully commissioned. PSL plans to expand this capacity to a 300,000 tons two-
step mill as it foresees strong demand in the region both from oil and gas and
construction sectors.

Valuation—maintain target price of Rs500 and BUY rating; revise WACC to

13%
We maintain our 12-month DCF-based target price of Rs500 and BUY rating. However,
we increase our WACC assumption to 13% from 12.5% earlier to account for higher
cost of equity due to rising interest rates. The stock currently trades at 7.6X and 6.1X
FY2009E EPS and EBITDA, respectively.

Exhibit 1: Forecasts and valuation (consolidated)

Sales EBITDA Adj. PAT EPS RoAE P/E EV/EBITDA

March year-end (Rs mn) (Rs mn) (Rs mn) (Rs) (%) (X) (X)
2006 14,503 1,550 519 14.1 22.6 24.8 11.9
2007 14,433 1,642 653 15.8 20.7 22.2 12.1
2008E 21,196 1,923 845 19.4 17.7 18.0 11.5
2009E 38,737 3,902 1,998 45.9 28.7 7.6 6.1
2010E 49,479 5,160 2,910 66.8 31.7 5.2 4.1

Source: Company data, Kotak Institutional Equities estimates.

Kotak Institutional Equities Research 11

 India Daily Summary - June 25, 2008

Exhibit 2: PSL: Interim results (standalone), March fiscal year-ends, (Rs mn)

qoq yoy yoy

4QFY08 3QFY08 (% chg) 4QFY07 (% chg) FY08 FY07 (% chg)
Gross revenues 6,556 6,591 (0.5) 4,013 63.4 22,213 15,998 38.8
less: excise 393 380 3.5 599 (34.3) 1,338 1,565 (14.5)
Net revenues 6,163 6,211 (0.8) 3,414 80.5 20,875 14,433 44.6
Total expenditure (5,684) (5,692) (0.1) (3,120) 82.2 (18,972) (12,792) 48.3
Inc/(Dec) in stock (1,496) (143) 944.6 258 (679.3) 545 773 (29.5)
Raw materials (2,326) (4,075) (42.9) (1,728) 34.6 (14,605) (10,600) 37.8
Staff cost (131) (183) (28.5) (143) (8.4) (538) (470) 14.5
Other expenditure (1,732) (1,291) 34.2 (1,506) 15.0 (4,373) (2,495) 75.3
EBITDA 478 519 (7.8) 294 62.6 1,903 1,642 15.9
OPM (%) 7.8 8.4 8.6 9.1 11.4
Other income 129 189 (31.5) 103 25.7 429 274 56.4
Interest (160) (163) (1.5) (106) 50.7 (579) (563) 2.8
Depreciation (122) (130) (6.6) (111) 9.5 (512) (445) 15.0
Pretax profits 326 415 (21.5) 180 81.3 1,242 908 36.7
EBIT% 7.9 9.3 8.4 8.7 10.2
Tax (143) (113) 26.3 (50) 184.4 (394) (255) 54.3
Net income 183 302 (39.3) 130 41.5 848 653 29.9

Source: Company data, Kotak Institutional Equities.

Exhibit 3: PSL Ltd., change in estimates, March fiscal year-ends, (Rs mn)

Revised estimate Old estimate Change (%)

2009E 2010E 2009E 2010E 2009E 2010E
Revenue 38,737 49,479 30,651 38,267 26.4 29.3
EBITDA 3,902 5,160 3,405 4,278 14.6 20.6
EBITDA margin (%) 10.1 10.4 11.1 11.2 — —
Adjusted net profit 1,998 2,910 1,680 2,314 18.9 25.8

Source: Kotak Institutional Equities estimates.

Exhibit 4: PSL Ltd: Change in volume and pricing assumptions, March fiscal year-ends

Revised estimate Old estimate Change (%)

2009E 2010E 2009E 2010E 2009E 2010E
Sales ('000 tons)
India 495 528 440 528 12.5 —
UAE 32 38 32 38 — —
USA 56 165 56 105 — 57.1
Realisation (US$/ton)
India 1,487 1,517 1,316 1,336 13.0 13.5
UAE 1,532 1,562 1,356 1,376 13.0 13.5
USA 1,800 1,800 1,400 1,421 28.6 26.7
Raw material cost (US$/ton)
HR coil 925 971 800 808 15.7 20.2

Source: Kotak Institutional Equities estimates.

12 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

Exhibit 5: Recent orders announced by PSL

Agency Rs (mn) Details Kms Tons

BPCL 1230 Bina-Kota pipeline 262 20,000
GAIL 19280 Vijaipur - Dadri - Bawana 470 230,000
Florida Gas transmission Company (USA) 17556 Gas pipeline and coating 869 220,000
Hanwa Co. Ltd (Japan) 1890 Water home project at Palm Beach project (Middle East) 60 28,000
HPCL-Mittal pipelines Ltd. 9170 Mundra-Bhatinds crude line (Bhatinda refinery) 1,024 140,000
L&T 3080 Barmer water pipeline 220 50,000

Source: Company.

Exhibit 6: Operating assumption for PSL

2008 2009E 2010E 2011E

Sales ('000 tons)
India 410 495 528 550
UAE 7 32 38 41
USA - 56 165 180
Realisation (US$/ton)
India 1,118 1,487 1,517 1,487
UAE 900 1,532 1,562 1,531
USA 1,800 1,800 1,773

Raw material cost (US$/ton)

HR coil 701 925 971 961
EBITDA
EBITDA (Rs mn) 1,923 3,902 5,160 5,299
EBITDA / ton ($) 115 159 170 168

Source: Kotak Institutional Equities estimates.

Kotak Institutional Equities Research 13

 India Daily Summary - June 25, 2008

Exhibit 7: Profit model, balance sheet, cash model for PSL Ltd 2005-2011E, March fiscal year-ends (Rs mn)

2005 2006 2007 2008E 2009E 2010E 2011E

Profit model
Net revenues 14,092 14,503 14,433 21,196 38,737 49,479 50,645
EBITDA 1,173 1,550 1,642 1,923 3,902 5,160 5,299
Other income 170 193 274 448 391 443 420
Interest (expense)/income (648) (690) (563) (579) (721) (672) (514)
Depreciation (240) (344) (445) (538) (705) (828) (841)
Bad Debt written off - - - - - - (36)
Pretax profits 454 708 908 1,254 2,867 4,103 4,329
Tax (102) (192) (280) (381) (749) (839) (885)
Deferred taxation (20) 3 25 (28) (71) (51) (26)
Minority Intt — — — — (48) (303) (344)
Adjusted consolidated net income 333 519 653 845 1,998 2,910 3,074
Diluted Earnings per share (Rs) 11.5 14.1 15.8 19.4 45.9 66.8 70.5

Balance sheet
Total equity 1,825 2,777 3,519 6,003 7,899 10,453 13,170
Deferred taxation liability 35 32 7 35 106 156 182
Total borrowings 6,490 6,810 6,698 8,107 9,704 6,663 5,000
Minority Interest — — — — 48 351 695
Current liabilities 4,817 5,898 5,791 7,473 12,466 15,635 15,984
Total liabilities and equity 13,168 15,518 16,015 21,618 30,223 33,259 35,031
Cash 1,796 1,199 1,263 1,200 1,200 1,200 3,772
Other current assets 8,477 10,654 9,596 13,408 21,908 25,614 25,495
Total fixed assets 2,793 3,564 5,131 6,985 7,090 6,420 5,740
Miscl. Exps. not w/o 0 0 0 — — — —
Investments 102 102 25 25 25 25 25
Total assets 13,168 15,518 16,015 21,618 30,223 33,259 35,031

Free cash flow

Operating cash flow, excl working capital 342 900 1,042 963 2,431 3,649 3,864
Working capital changes (2,179) (1,267) 695 (2,287) (3,563) (588) 468
Capital expenditure (1,180) (1,115) (2,012) (2,392) (810) (158) (160)
Investments (56) — 77 — — — —
Other income 12 41 142 448 391 443 420
Free cash flow (3,060) (1,441) (57) (3,268) (1,551) 3,347 4,592

Ratios (%)
EBITDA margins (%) 8.3 10.7 11.4 9.1 10.1 10.4 10.5
Debt/equity 3.5 2.4 1.9 1.3 1.2 0.7
Net debt/equity 2.5 2.0 1.5 1.1 1.1 0.5
RoAE 18.3 22.6 20.7 17.7 28.7 31.7
RoACE 13.2 11.4 10.7 10.1 15.7 19.1

14 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

Exhibit 8: DCF valuation of PSL, March fiscal year-ends (Rs mn)

Terminal
2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E Value
EBITDA 3,902 5,160 5,299 5,065 4,673 4,696 4,685 4,685 4,685
Tax expense (923) (951) (960) (910) (823) (883) (897) (916) (857)
Changes in working capital (3,563) (588) 468 1,272 1,022 185 125 (0) —
Cash flow from operations (584) 3,621 4,807 5,428 4,872 3,998 3,913 3,768 3,828
Capital expenditure (810) (158) (160) (163) (220) (225) (287) (294) (843)
Free cash flow to the firm (1,395) 3,463 4,646 5,265 4,652 3,773 3,626 3,474 2,984 25,119
Dicounted cash flow-now (1,270) 2,791 3,313 3,322 2,598 1,864 1,586 1,345 1,022
Discounted cash flow-1 year forward - 3,153 3,744 3,754 2,935 2,107 1,792 1,519 1,155
Discounted cash flow-2 year forward - 4,231 4,242 3,317 2,381 2,025 1,717 1,305

Discount rate 13.0%

Growth from 2017 to perpetuity 1.0%

Discount factor at WACC - 0.91 0.81 0.71 0.63 0.56 0.49 0.44 0.39 0.34

+ 1-year + 2-years Sensitivity of DCF value to WACC and growth rate (Rs)
Total PV of free cash flow (a) 20,160 67% 19,217 64% WACC
PV of terminal value (b) 9,722 33% 10,985 36% 489 12.0% 12.5% 13.0% 13.5% 14.0%
EV (a) + (b) 29,881 30,203 -0.5% 507 484 462 441 422
EV (US$ mn) 738 746 0.0%
Growth Rate
518 493 470 449 429
Net debt 8,552 5,814 0.5% 529 503 479 457 437
Equity value 21,329 24,388 1.0% 542 514 489 466 445
No. of shares 43.6 43.6 1.5% 555 527 500 476 453
Implied share price (Rs) 489 560 2.0% 571 540 512 486 463
Exit EV/EBITDA multiple (X) 5.4 2.5% 587 555 525 498 473
Exit FCF multiple (X) 8.4

Source: Company, Kotak Institutional Equities estimates.

Kotak Institutional Equities Research 15

 India Daily Summary - June 25, 2008

Metals Hindalco: Rights issue to fund Novelis acquisition; balance funding

may prove costly—cut target price to Rs150; lower rating to REDUCE
HALC.BO, Rs145
Rating REDUCE
Amit Agarwal : agarwal.amit@kotak.com, +91-22-6749-3390*
Sector coverage view Attractive
Target Price (Rs) 150 • Hindalco will raise Rs50 bn through a rights issue to fund the Novelis bridge loan of
52W High -Low (Rs) 240 - 135 US$3 bn—balance to be funded through treasury and debt
Market Cap (Rs bn) 252.4
• We reduce our target multiple to factor in lower global valuations for non-ferrous
companies—we now value both aluminum and copper business at 6X FY2010E
Financials
EBITDA
March y/e 2008 2009E 2010E
Sales (Rs bn) 196.5 212.9 217.2 • Reduce target price to Rs150/share (Rs215/share earlier) factoring lower multiple,
Net Profit (Rs bn) 22.8 28.2 25.4 dilution on account of rights issue
EPS (Rs) 13.1 16.2 14.6
EPS gth (10.9) 23.5 (9.9) Hindalco would be raising Rs50 bn through a rights issue at a ratio of 1:3 to replace
P/E (x) 11.1 9.0 9.9 the bridge loan of US$3 bn taken for the Novelis acquisition. The balance would be
EV/EBITDA (x) 6.8 5.4 5.3 funded through treasury and debt. We believe given current market conditions, debt
Div yield (%) 0.9 1.2 1.2 would prove to be quite expensive. We factor raising US$1 bn through treasury and
US$0.9 bn of debt to replace the bridge loan. We reduce our target EV/EBITDA
multiple for valuing the aluminum and copper business in line with global valuations.
Shareholding, March 2008 We now value aluminum and copper business at 6X FY2010E EV/EBITDA. We roll
% of Over/(under) forward to FY2010 and lower our 12-month target price to Rs150/share (Rs215/share
Pattern Portfolio weight previously) and lower our rating on the stock to REDUCE (ADD earlier).
Promoters 31.4 - -
FIIs 24.0 0.6 0.1 Hindalco will raise Rs50 bn through a rights issue to fund the Novelis bridge
MFs 3.7 0.5 (0.0) loan of US$3 bn—balance to be funded through treasury and debt
UTI - - (0.5)
Hindalco would be raising Rs50 bn through a rights issue at a ratio of 1:3 to replace
LIC 10.7 1.4 0.8
the bridge loan of US$3 bn taken for the Novelis acquisition. Based on the ratio of one
share for every three shares held, Hindalco would be issuing 436 mn shares as a result
of which the fully diluted number of shares shall be increase to 1,742 mn shares from
1,307 shares previously. We estimate the implied price of the rights issue at Rs115/
share. The balance would be funded through treasury and debt. We believe that given
the current market conditions, debt would prove to be quite expensive. We factor
raising US$1 bn through treasury and US$0.9 bn of debt to replace the bridge loan.
We expect the debt to be raised at Libor +350 bps.

We reduce our multiple to factor in lower global valuations for non-ferrous

companies
We value the aluminum business of Hindalco at 6X FY2010E EV/EBITDA and the
copper business at 6X FY2010E EV/EBITDA. We have reduced our multiple to factor
lower global valuations and the fact that the commodity cycle is near its peak.

Reduce target price to Rs150/share (Rs215/share earlier) factoring lower

multiple, dilution on account of rights issue
We maintain our standalone earnings estimates for Hindalco but roll over valuations to
FY2010E. We value the aluminum and copper business of Hindalco at 6X FY2010E EV/
EBITDA each. We value Novelis at a premium to Hindalco as it is a pure conversion
business with lower volatility in earnings—we value Novelis’ EBITDA without its loss
making contracts at 6.6X FY2010E EV/EBITDA. We reduce our 12-month target price
to Rs150/share (Rs215/share previously) to reflect the equity dilution on account of the
rights issue and lower EBITDA multiple. We lower our rating on the stock to REDUCE
from ADD previously.

*Amit Agarwal has assumed interim charge of KIE’s metals coverage.

16 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

Hindalco, SOTP-based target-price, 2010E basis

EBITDA EV/EBITDA EV Stake Attributable EV Value

(Rs bn) (X) (Rs bn) (%) (Rs bn) (US$ mn) (Rs/share)
Copper business 6 6.0 39 100 39 919 22
Aluminium business 32 6.0 193 100 193 4,596 111
ABML (a) 51 12 279 7
Novelis (b), (d) 24 6.6 158 100 158 3,770 91
PV of Novelis beverage can contracts (c) (5) (112) (3)
Total enterprise value 397 9,453 228

Total debt 142 3,385 82

Hindalco's debt (excl. LBO debt) (13) (302) (7)
LBO debt 38 910 22
Novelis standalone debt 117 2,778 67

Value of investments 6 153 4

Resultant market capitalization 261 6,221 150

Target price (Rs/share) 150

Notes:
(a) Stake in ABML is valued based on market-capitalization of ABML.
(b) We value Novelis' EBITDA without its loss-making contracts.
(c) Loss-making beverage can contracts will likely exhaust by CY2009. We use 12% discounting for calculating its PV.
(d) We have valued Novelis at 10% premium to Hindalco's aluminium business valuations.

Source: Kotak Institutional Equities estimates.

Kotak Institutional Equities Research 17

 India Daily Summary - June 25, 2008

Hindalco (standalone), Profit model, balance sheet and cash flow model, March fiscal year-ends, 2005-2010E (Rs mn)

2005 2006 2007 2008E 2009E 2010E

Profit model (Rs mn)
Net sales 95,235 113,965 183,130 196,491 212,904 217,211
EBITDA 22,765 26,051 40,150 38,498 44,604 41,840
Other income 2,700 2,439 3,701 3,648 6,108 6,069
Interest (1,700) (2,252) (2,424) (3,316) (2,947) (2,947)
Depreciaiton (4,633) (5,211) (6,380) (7,542) (9,137) (10,152)
Profit before tax 19,042 21,057 35,046 31,289 38,628 34,811
Current tax (5,705) (3,342) (9,954) (7,181) (8,865) (7,989)
Deferred tax (43) (1,160) 551 (1,267) (1,564) (1,410)
Net profit 13,294 16,556 25,643 22,841 28,198 25,412
Earnings per share (Rs) 7.7 9.5 14.7 13.1 16.2 14.6

Balance sheet (Rs mn)

Equity 76,666 96,063 124,180 170,534 245,614 267,907
Deferred tax liability 11,297 12,334 11,258 12,525 14,090 15,499
Total Borrowings 38,000 49,034 73,686 73,686 73,686 73,686
Current liabilities 25,182 31,527 40,275 42,055 44,241 44,815
Total liabilities 151,145 188,958 249,400 298,801 377,631 401,908
Net fixed assets 69,265 76,157 84,831 112,290 123,153 128,002
Investments 37,021 39,713 86,753 69,553 119,553 119,553
Cash 4,010 9,173 6,655 41,551 54,302 72,362
Other current assets 40,755 63,855 71,128 75,375 80,591 81,959
Miscellaneous expenditure 94 60 32 32 32 32
Total assets 151,145 188,958 249,400 298,801 377,631 401,908

Free cash flow (Rs mn)

Operating cash flow excl. working capital 23,488 23,168 34,551 31,649 38,899 36,973
Working capital changes (5,878) (16,085) (1,185) (2,466) (3,030) (795)
Capital expenditure (11,205) (11,982) (13,472) (35,000) (20,000) (15,000)
Free cash flow 6,404 (4,899) 19,893 (5,817) 15,869 21,178

Ratios
Debt/equity (%) 43.2 45.2 54.4 40.3 28.4 26.0
Net debt/equity (X) 0.4 0.4 0.5 0.2 0.1 0.0
RoAE (%) 16.1 16.9 21.0 14.3 12.7 9.4
RoACE (%) 12.6 13.0 14.9 10.9 10.3 8.0

Source: Company, Kotak Institutional Equities estimates.

18 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

Economy Growth to trim on RBI’s strong signal; but inflation is destined to stay
high
Sector coverage view N/A

Mridul Saggar : mridul.saggar@kotak.com, +91-22-6634-1245

• RBI hikes CRR by 50 bps to 8.75, repo rate by 50 bps to 8.5%; we expect CRR at
9.25% and repo rate at 8.75% during the year

• CRR hike to mop up nearly Rs200 bn of primary liquidity; repo rate hike to increase
cost of borrowed funds

• Tightening to slow aggregate demand; revise our real GDP growth projection to
7.9% from 8.2% for FY2009E

• Inflation likely to stay in double digits till 3QFY09; but preemptive tightening to help
contain second round impact of fuel-price-led inflation

RBI hiked CRR and repo rate by 50 bps each on June 24. The 50+50 signal adds up to
100% certainty that interest rates would harden soon. The hikes are expected to goad
loath public sector banks procrastinating on raising lending rates to do so in the near
term. The hike also came a bit sooner than was generally expected by the markets
and does not appear to be fully priced in the bond yields as yet. We expect bond yields
to immediately move up by further 20-30 bps across yield curve and not just at the
short-end of the curve. We also expect interest rates to harden by about 50 bps
causing both consumption and investment demand to fall. Accordingly, we are
trimming our real GDP growth projection for FY2009 to 7.9% from 8.2%.

RBI tightens monetary policy further

With headline inflation touching double digits in the data released last Friday, RBI’s
response (see Exhibit 1) came quicker than expected. Well after close of markets
yesterday, RBI announced:
· Increase in repo rate to 8.5% from 8.0% with effect from June 25, 2008
· Increase in CRR to 8.5% effective fortnight beginning July 5, 2008 and to 8.75%
from fortnight beginning July 19, 2008 from 8.25% currently

Reasons behind RBI action

Major concerns highlighted in the accompanying communication by the central bank
were:
1) Increase in inflation rate to 11.05% on June 7, 2008 from 7.75% at end-March
2008 and 4.28% a year ago.
2) Ex-fuel and food (core inflation), inflation has risen to 10.33% from 6.33% a year
ago
3) CPI inflation has also yoy. [CPI for industrial workers at 7.8% (vs 6.67%); CPI for
urban non-manual employees at 6.99% (vs 7.74%); CPI for agricultural laborers: at
9.11% (vs 8.22%) and CPI for rural laborers at 8.44% (vs7.90%)]
4) M3 growth at 21.4% yoy is well above the annual monetary policy projection of
16.5-17%
5) High and volatile energy prices are not necessarily a temporary phenomenon any
longer
6) Aggregate deposit growth at 23.2% yoy is above annual monetary policy projection
of 17%
7) Non-food credit growth at 26.2% yoy is above Annual monetary policy projection of
20%

Kotak Institutional Equities Research 19

 India Daily Summary - June 25, 2008

8) High and volatile energy prices

9) India is somewhat decoupled from the intensifying global food crisis
10) The external sector is strong and resilient with modest current account deficits
relative to the size of the economy and has a comfortable level of foreign
exchange reserves
11) Therefore, the major focus of public policy needs to be on dealing with the crude
prices and moderating and managing aggregate demand so that pressure on
prices are not intensified
12) Aggregate demand pressures are visible in: (a) 13-year high inflation, (b) strong
investment demand growing at 14-19% annually and constituting 36% of GDP,
(c) non-oil imports increasing at considerable pace, contributing more than 60%
of overall import growth in April 2008 and (d) likely additional pressure on
demand arising from fiscal side with possibly enhanced subsidies for food,
fertilizers and fuel

RBI analysis underplaying growth concerns

We broadly agree with RBI’s analysis above, except that:
1) It has misread the April trade data as indicating strong non-oil import demand as
non-oil imports contributed over 60% of the total. This ratio has in fact averaged
over 70% since at least the start of the present decade. April trade data does not
indicate stronger non-oil import growth than it was in recent past.
2) It has read April IIP numbers as indicating revival of capital goods and consumer
durable goods growth in its accompanying communication. It is true that capital
goods production increased 14.2% yoy in April. But this does not indicate revival as
its production was in fact 36.6% over the preceding month. Even ignoring the
March bulge, capital goods output in April was at a nine-month low. Similarly,
consumer durables did record a positive growth after contraction in eight of the
months in FY2008, but it would be hasty to conclude its revival. The April output
level for consumer durables was not only 12% down over the year-end March
bulge, but also lower by 7% over that in January and February of 2008.
3) RBI communication is also completely silent on deteriorating corporate performance
and the risks to earning growth arising from the RBI policy action.

In our view, RBI may have tightened a bit too excessively and could have spaced the
repo rate hike as well. RBI had already raised CRR by 75 bps and repo rate by 25 bps
in this quarter and the further monetary tightening could dampen aggregate demand
excessively ahead, when the nature of inflation remains predominantly supply-side
coming from fuel and metal prices (see Exhibit 2). We do not see RBI measures being
able to change the inflation trajectory. Inflation is likely to be about 13% yoy in
October after which it may plateau and then decline sharply in 4QFY09 to near 8%.
WPI inflation is more likely to average close to 10% in FY2009 notwithstanding the
monetary policy tightening. If RBI tightens further from here growth could be at a
serious risk.

Our revised growth assessment suggest a 7.9% real GDP growth in FY2009
Call, CBLO and market repo rates are likely to trade at about 8.6% today and are
likely to hover around 8.5% over a month. We see 91-day T-bill yields touching 8.5%
and 10-year G-sec yield touching 8.75% within a week or two. We also expect further
rise in deposit as well as lending rates. Interest rates across spectrum would harden as
a result of unambiguously strong signal by the central bank. Considering the above,
we are trimming our real GDP growth forecast to 7.9% from 8.2% (see Exhibit 3).

20 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

While we had already factored in some further monetary tightening in our real GDP
growth assessment of 8.2% (CRR of 8.75% and repo rate of 8.25%) made in our May
9 Economy report, “Bulwarks against headwinds firmly in place”, the tightening has
been faster and more in intensity. We now see CRR at 9.25% and repo rate at 8.75%
during the year before monetary policy starts unwinding. The revised growth
assessment factors in this possibility. The unwinding would be crucial if growth in
FY2010 is to be protected.

Exhibit 1: Monetary tightening continues since mid-2004

RBI's repo, reverse repo rates and cash reserve ratio (%)

11
Reverse repo rate Repo rate CRR
10

2
Jul-01

Jul-02

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08
Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08
Source: Reserve Bank of India

Exhibit 2: Supply-side factors drive inflation up

Increase in WPI and its major components till June 7, 2008 (%); the weighted contribution of major components to this increase (%)

Price rise since: Weighted contribution to increase in WPI since:

weight end-Mar. '08 since Oct.13,'08 end-FY2007 FY1994 end-Mar.'08 since Oct.13,'08 end-FY2007 FY1994
All commodities 100.0 3.7 9.4 11.8 135.2 99.8 99.6 99.9 100.0
Primary articles 22.0 2.4 8.4 12.3 142.5 14.8 20.5 23.6 23.2
Food articles 15.4 1.5 3.8 8.1 131.6 6.2 6.5 10.8 15.0
Non-food articles 6.1 5.3 14.3 17.3 139.2 8.7 9.1 8.7 6.3
Minerals 0.5 0.0 48.3 49.9 530.1 0.0 4.9 4.1 1.9
Fuel, power, light & lubricant 14.2 9.5 15.6 16.9 274.2 54.2 35.6 31.0 28.9
Coal mining 1.8 0.0 9.8 9.8 154.4 0.0 2.0 1.6 2.0
Minerals oils 7.0 15.9 24.3 26.6 380.8 54.1 32.5 28.5 19.7
Electricity 5.5 0.0 1.4 1.5 176.5 0.0 1.0 0.9 7.2
Manufactured products 63.7 2.1 7.3 9.6 101.6 30.8 43.6 45.2 47.9
Food products 11.5 1.9 9.5 11.4 107.4 5.2 10.3 9.9 9.2
Beverages tobacco & tobacco products 1.3 3.2 7.7 11.4 185.6 1.4 1.4 1.6 1.8
Textiles 9.8 5.2 1.7 0.7 34.5 7.7 1.1 0.4 2.5
Wood & wood product`s 0.2 9.8 9.8 9.8 137.0 0.4 0.2 0.2 0.2
Paper & paper products 2.0 2.5 2.4 3.6 99.4 1.2 0.5 0.6 1.5
Leather & leather products 1.0 1.3 (0.5) 1.1 66.5 0.3 (0.0) 0.1 0.5
Rubber & plastic products 2.4 0.2 2.4 5.8 63.9 0.1 0.5 0.9 1.1
Chemicals & chemical products 11.9 1.5 4.5 7.5 114.0 4.4 5.4 7.2 10.1
Non-metallic mineral products 2.5 (0.6) 1.3 5.8 113.4 (0.4) 0.3 2.0 2.1
Basic metals alloys & metals products 8.3 1.4 19.6 22.1 195.8 4.1 20.0 18.0 12.1
Machinery & machine tools 8.4 3.0 3.2 6.5 72.9 4.9 2.2 3.6 4.5
Transport equipment & parts 4.3 2.5 5.0 6.5 74.0 2.2 1.8 1.8 2.4
Note:
(1) Total weighted contribution may not exactly add up to 100 due to rounding off
(2) Figures in bracket reflect negative numbers

Source: Kotak Institutional Equities.

Kotak Institutional Equities Research 21

 India Daily Summary - June 25, 2008

Exhibit 3: Monetary policy tightening to trim real GDP growth to 7.9% from 8.2%
Real GDP at factor cost and components (growth rates in %), March fiscal year-ends 2004-2009E

Earlier Now
Sector 2004 2005 2006 2007 2008 2009E 2009E
Agriculture and allied activities 10.0 0.0 5.9 3.8 4.5 3.0 3.0
Industry 6.0 8.5 8.0 10.6 8.1 7.6 7.3
Mining and quarrying 3.1 8.2 4.9 5.7 4.7 7.1 7.1
Manufacturing 6.6 8.7 9.0 12.0 8.8 7.7 7.3
Electricity, gas and water supply 5.0 5.2 5.2 6.0 6.3 7.6 7.4
Services 8.8 9.9 11.0 11.2 10.7 9.8 9.5
Construction 12.0 16.1 16.5 12.0 9.8 8.5 7.2
Trade, hotels, transport, storage and communication 12.0 10.7 11.5 11.8 12.0 9.7 9.5
Financing, insurance, real estate and business services 5.6 8.7 11.4 13.9 11.8 9.3 9.1
Community, social and personal services 5.4 6.9 7.2 6.9 7.3 11.0 11.0
Real GDP at factor cost 8.5 7.5 9.4 9.6 9.0 8.2 8.2

Source: Central Statistical Organisation, Government of India, Kotak Institutional Equities estimates.

22 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

Cement Crude oil linked inflation woes to impact profitability of cement

Sector coverage view Cautious companies

Price, Rs Aman Batra : aman.batra@kotak.com, +91-22-6634-1231

Company Rating 24-Jun Target Murtuza Arsiwalla : murtuza.arsiwalla@kotak.com, +91-22-66341-125
Gujarat Ambuja REDUCE 81 95
ACC REDUCE 592 650 • Average realizations for FY2009 reduced by Rs5-7/bag
Grasim REDUCE 2,090 2,320
• Higher freight costs on account of revised fuel prices
India Cements ADD 151 175
UltraTech Cement BUY 562 750 • Steep correction in valuation multiples, ahead of margin correction
Shree Cement BUY 672 1,080
We have revised the earnings and target prices of all cement companies under
coverage to factor in (1) higher fuel and freight cost on account of increasing crude oil
prices, (2) spiraling prices of imported coal, (3) downward pressure on cement
realizations as we expect capacity utilization to decline with incremental supply and
slowdown in consumption and (4) higher cost-of-capital in an increased interest rate
environment. We estimate decline EBITDA/ton across the sector as price trend remains
weak in a rising cost environment. Marginal relief for UltraTech and Ambuja Cements
stems from reversal of export ban imposed in May. We maintain our 'Cautious' view
on the sector, despite the sharp correction in valuation multiples, as in our view
EBITDA margins and utilization rates will continue to deteriorate as the business cycle
reverses to one of surplus supply. We note smaller companies are trading at a discount
to replacement cost while they continue to make good margins—upgrade Shree
Cement and UltraTech Cement to BUY and India Cements to ADD.

Average realizations for FY2009 reduced by Rs5-7/bag. We now factor in 3% yoy

decline in FY2009E realizations followed by a further 5% yoy decline in FY2010E,
compared with our earlier assumption of flat realizations in FY2009E followed by a 5%
decline in FY2010E. The revision in our estimates stems from (1) increased government
pressure to contain cement prices in a bid to moderate inflation and (2) commissioning
of new cement capacities increasing supplies while demand growth has been
lackluster. In our view, slowdown in consumption growth in a high inflation and interest
rate environment could further aggravate the demand-supply imbalance. We note that
the cement sector added 8 mn tpa of cement capacity in March 2008 alone, and
Grasim (along with UltraTech) has already commissioned clinker capacities equivalent
to 9 mn tpa of cement capacity that will likely start commercial production by
3QFY2009.

Higher freight costs on account of revised fuel prices. We have revised the tariff
on road transport by 10% in order to give effect to the revision in fuel prices. Freight
cost account for almost 25% of the cost of production, and hence any increase in
freight cost will likely have a significant bearing on profitability. We note that road
freight accounted for 59% of cement despatched in FY2008. Increase in freight costs
also increases the cost of inputs such as flyash and slag.

Steep correction in valuation multiples, ahead of margin correction. Valuation

multiples for cement companies have come off sharply from their peaks since the last
two quarters, even though the industry is yet to experience the bottoming of the
cement cycle. In our view significant addition of cement capacities across the industry,
will result in falling utilization rates accompanied by declining EBITDA margins in the
quarters to come. The impact of increased supplies could be further compounded by
(1) rising input costs (2) probable slowdown in cement consumption—consumption
growth was at 5.6% during April-May 2008, and (3) regulatory and/or fiscal
intervention from the government.

We highlight company-wise revision in target price and estimates and key factors that
will drive earnings and valuations during the current fiscal and help companies partially
overcome pressures on EBITDA margins.

Kotak Institutional Equities Research 23

 India Daily Summary - June 25, 2008

ACC (CMP Rs625, TP Rs650, REDUCE). We have revised our target price for ACC to
Rs650 (Rs800 previously) and estimate earnings of Rs65 (Rs68.8 previously) for CY2008
and Rs51.6 (Rs63.7 previously) for CY2009. ACC is less impacted by increase in diesel
prices due to (1) distributed network of plants leading to shorter lead distance, and (2)
higher dependence on rail network compared to peers.

Ambuja Cements (CMP Rs81, TP Rs95, REDUCE). We have revised our target price
for Ambuja to Rs95 (Rs117 previously) and estimate earnings of Rs8 (Rs8.8 previously)
for CY2008 and Rs6.6 (Rs8.3 previously) for CY2009. We expect dependence on
purchased clinker for newly commissioned grinding capacities to weigh on EBITDA
margins upto 2HCY2009 when fresh clinker capacity at Bhatapara (2.2 mn tpa) will
likely get commissioned. Ambuja Cement also utilizes imported coal at its production
facilities in Gujarat.

Grasim Industries (CMP Rs2,090, TP Rs2,320, REDUCE). We have revised our SOTP-
based target price for Grasim to Rs2,320 (Rs2,750 previously) and estimate earnings of
Rs228 (Rs267 previously) for FY2009 and Rs218 (Rs260 previously) for FY2010. We use
6X EV/EBITDA for cement business valuation compared to 7X previously and factor in
the decline in value of investments.

India Cements (CMP Rs151, TP Rs175, ADD). We have revised our target price for
India Cements to Rs175 (Rs270 previously) and estimate earnings of Rs23.3 (Rs27.9
previously) for FY2009 and Rs23.4 (Rs26.8 previously) for FY2010. The decline in India
Cements profitability can be attributed to the combined impact of—(1) higher
dependence on imported coal, and (2) higher proportion of road transport. India
Cements is currently increasing its capacity to 15 mn tpa by end-FY2009 from the
current 9 mn tpa. We estimate the stock to be trading at EV of US$96/ton on FY2009
production.

Shree Cement (CMP Rs672, TP Rs1,080, BUY) We have revised our target price for
Shree Cement to Rs1,080 (Rs1,300 previously) and estimate earnings of Rs97.8 (108.6
previously) for FY2009 and Rs60 (Rs89.5 previously) for FY2010. Shree Cement will
likely benefit from the expanded capacities (added 3 mn tpa during the past year)
which will have their first full year of production during the current fiscal. While the
company could likely face severe pressure on realizations due to bunching of
capacities in its key market of North India, its superior profitability gives it an edge over
peers. We estimate the stock to be trading at EV of US$68/ton on FY2009 production.

UltraTech (CMP Rs562, TP Rs750, BUY). We have revised our target price for
UltraTech to Rs750 (Rs850 previously) and estimate earnings of Rs82 (Rs86 previously)
for FY2009 and Rs61 (Rs77 previously) for FY2010. UltraTech will likely benefit from
the reversal of ban earlier imposed on exports of cement and clinker from Gujarat as
realizations in the export market have improved to US$60/ton. UltraTech will also
benefit from the commercial production of cement at its new facility at Tadipatri in
Andhra Pradesh, for which the clinker units have already been commissioned. Increase
in costs of imported coal will be partially offset by the commissioning of captive power
plants during the current FY that will reduce UltraTech’s dependence on costlier grid
power.

24 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

Revision in earnings estimates to refelect decline in realizations and higher fuel and freight costs
Earnings estimates for cement companies under coverage (Rs mn)
Sales
2009E 2010E
Company Revised Old (% chg) Revised Old (% chg)
ACC 74,411 75,875 (1.9) 78,063 81,472 (4.2)
Ambuja Cement 61,262 62,334 (1.7) 66,535 68,614 (3.0)
Grasim Industries 182,081 185,042 (1.6) 200,409 204,281 (1.9)
India Cements 33,760 34,079 (0.9) 38,444 38,827 (1.0)
Shree Cement 26,068 26,297 (0.9) 26,730 27,348 (2.3)
UltraTech Cement 61,890 60,209 2.8 66,222 65,854 0.6

EBITDA
2009E 2010E
Company Revised Old (% chg) Revised Old (% chg)
ACC 20,160 21,769 (7.4) 17,673 21,342 (17.2)
Ambuja Cement 20,269 21,714 (6.7) 18,542 21,890 (15.3)
Grasim Industries 48,022 53,214 (9.8) 46,365 53,424 (13.2)
India Cements 10,834 12,770 (15.2) 11,729 13,203 (11.2)
Shree Cement 9,312 9,828 (5.3) 7,824 8,897 (12.1)
UltraTech Cement 19,018 19,597 (3.0) 15,759 18,511 (14.9)

EPS (Rs)
2009E 2010E
Company Revised Old (% chg) Revised Old (% chg)
ACC 65.0 68.8 (5.5) 51.6 63.7 (19.0)
Ambuja Cement 8.0 8.8 (8.3) 6.6 8.3 (20.0)
Grasim Industries 228.9 267.4 (14.4) 218.4 260.2 (16.1)
India Cements 23.3 27.9 (16.3) 23.4 26.8 (12.9)
Shree Cement 97.8 108.6 (9.9) 60.0 89.5 (32.9)
UltraTech Cement 81.9 86.1 (4.8) 61.4 77.1 (20.3)

Source: Kotak Institutional Equities estimates.

Target price have been revised by 13-35% to reflect decline in profitability

Revision in target prices for cement companies under coverage

Target price
Company Rating Revised Old (% chg)
ACC REDUCE 650 800 (19)
Ambuja Cement REDUCE 95 117 (19)
Grasim Industries REDUCE 2,320 2,750 (16)
India Cements ADD 175 270 (35)
Shree Cement BUY 1,080 1,300 (17)
UltraTech Cement BUY 740 850 (13)

Source: Kotak Institutional Equities estimates.

Kotak Institutional Equities Research 25

 India Daily Summary - June 25, 2008

Cement comparative valuation

Market cap. CMP (Rs) Target price EPS (Rs) P/E (X)
Company (US$ mn) 24-Jun (Rs) Rating 2007 2008E 2009E 2010E 2007 2008E 2009E 2010E
ACC 2,602 592 650 REDUCE 56.7 64.1 65.0 51.6 10.4 9.2 9.1 11.5
Ambuja Cement 2,856 81 95 REDUCE 8.5 7.6 8.0 6.6 9.5 10.7 10.0 12.2
Grasim Industries 4,464 2,090 2,320 REDUCE 215 285 229 218 9.7 7.3 9.1 9.6
India Cements 918 151 175 ADD 26.1 25.4 23.3 23.4 5.8 6.0 6.5 6.5
Shree Cement 546 672 1,080 BUY 45.2 85.9 97.8 60.0 14.9 7.8 6.9 11.2
UltraTech Cement 1,630 562 750 BUY 63.1 81.1 81.9 61.4 8.9 6.9 6.9 9.1

EV/EBITDA (X) EV/ton of production (US$) EV/ton of capacity (US$)

Company 2007 2008E 2009E 2010E 2007 2008E 2009E 2010E 2008E 2009E 2010E
ACC 6.2 4.8 4.7 6.0 134 115 102 104 101 84 89
Ambuja Cement 6.9 5.4 6.1 6.6 201 166 150 134 155 143 130
Grasim Industries 5.3 4.0 4.5 4.3 NA NA NA NA NA NA NA
India Cements 7.7 4.1 4.0 3.2 160 120 96 69 102 77 57
Shree Cement 4.7 2.9 2.6 2.7 142 101 68 55 70 62 48
UltraTech Cement 5.7 4.6 4.3 4.9 113 113 101 83 87 86 80

Note:
(a) Ambuja Cement - assumed exercise of put option for stake in ACIL.
(b) ACC - 2007 numbers for 12 months ending Dec 2006.
(c ) Ambuja Cement- 2007 numbers for 12 months ending Dec 2006 (adjusted).

Source: Company reports, Kotak Institutional Equities estimates.

SOTP valuation of Grasim

(Rs mn)

Sum of the Parts Methodology

Cement 157,068 6X EV/EBITDA - compared to ACC's historic average EV/EBITDA of 9X
VSF 37,095 DCF value implying an EV/EBITDA of 4.5X on FY2009E
Others (Chemicals) 6,593 DCF value implying an EV/EBITDA of 4.7X on FY2009E
Value of key investments 25,769 20% discount to current market price
Total EV 226,525

Gross debt 40,383

- Cash (26,380)
Net debt 14,003

Market capitalization 212,522

Number of shares o/s (mn) 91.7
Implied share price (Rs) 2,318

Target price (Rs) 2,320

Our target price implies EV/ton of US$111 for cement business.

Source: Company data, Kotak Institutional Equities estimates

26 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

Movement of Cement Index (LHS) and retail prices of cement (RHS)

2,600 Cement index (LHS) Retail price (RHS) 260

240
2,100
220

1,600 200

180
1,100 160

140
600
120

100 100
Apr-93

Apr-94

Apr-95

Apr-96

Apr-97

Apr-98

Apr-99

Apr-00

Apr-01

Apr-02

Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08
Source: CMA, Bloomberg, Kotak Institutional Equities.

Working on optimistic scenario - 10% growth in domestic consumption

Cement demand supply balance

FY2006 FY2007 FY2008 FY2009E FY2010E

Effective capacity (mn tpa) 156 164 181 215 251
Incremental capacity (mn tpa) 16.9 33.9 35.9
growth % 4.9 10.3 18.7 16.7

Cement consumption (mn tons) 136 148 163 180 198

growth % 9.5 10.0 10.0 10.0
Exports (mn tons) 6.0 5.8 3.6 3.0 3.0
growth % (37.6) (17.7) -

Cement depatches (mn tons) 142 154 167 183 201

growth % 9.0 8.2 9.4 9.8

Capacity utilization (%) 90.6 94.1 92.3 85.1 80.1

Source: CMA, Kotak Institutional Equities estimates.

Kotak Institutional Equities Research 27

 India Daily Summary - June 25, 2008

FOB prices for coal exports from Richard Bay in South Africa (US$/ton)
120

110

100

90

80

70

60

50

40
Aug-06

Aug-07
Apr-07

Apr-08
Jun-07
Dec-06

Dec-07
Oct-06

Feb-07

Oct-07

Feb-08
Source: globalCoal.com

28 Kotak Institutional Equities Research

 India Daily Summary - June 25, 2008

"Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is
responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject
companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related
to the specific recommendations or views expressed in this report: Lokesh Garg, Ravi Agrawal, Nitin Bhasin, Amit Agarwal, Mridul
Saggar, Aman Batra."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70% Equities, within the specified category.

60%
Percentage of companies within each category for which
Kotak Institutional Equities and or its affiliates has provided
50%
investment banking services within the previous 12 months.

40% 37.1%

30.8%
30% * The above categories are defined as follows: Buy = OP;
24.5% Hold = IL; Sell = U. Buy, Hold and Sell are not defined
Kotak Institutional Equities ratings and should not be
20% constructed as investment opinions. Rather, these ratings
are used illustratively to comply with applicable regulations.
10% 3.0% As of 31/03/2008 Kotak Institutional Equities Investment
4.9%
5.2% Research had investment ratings on 143 equity
3.0% 0.0% securities.
0%
BUY ADD REDUCE SELL

Source: Kotak Institutional Equities. As of March 31, 2008

Ratings and other definitions/identifiers

Rating system
Definitions of ratings

BUY. We expect this stock to outperform the BSE Sensex by 10% over the next 12 months.
ADD. We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months.
REDUCE: We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months.
SELL: We expect this stock to underperform the BSE Sensexby more than 10% over the next 12 months.

Our target price are also on 12-month horizon basis.

Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations:
Attractive (A), Neutral (N), Cautious (C).

Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or
Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company
and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental
basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied
upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.

Kotak Institutional Equities Research 29

 India Daily Summary - June 25, 2008

Corporate Office Overseas Offices

Kotak Securities Ltd. Kotak Mahindra (UK) Ltd. Kotak Mahindra Inc.
Bakhtawar, 1st Floor 6th Floor, Portsoken House 50 Main Street, Suite No.310
229, Nariman Point 155-157 The Minories Westchester Financial Centre
Mumbai 400 021, India London EC 3N 1 LS White Plains, New York 10606
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Copyright 2008 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.

Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with our affiliates
are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking and other business
relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals provide important input into our
investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its affiliates are seeking or will seek investment banking
or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may
participate in the solicitation of such business. Our research professionals are paid in part based on the profitability of Kotak Securities Limited, which include earnings from
investment banking and other business. Kotak Securities Limited generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining
a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons
reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals
may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary
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aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our
relationships with the company or companies that are the subject of this material is provided herein.
This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal.
We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a personal recommendation
or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients
should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this
material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance,
future returns are not guaranteed and a loss of original capital may occur. Kotak Securities Limited does not provide tax advise to its clients, and all investors are strongly advised
to consult with their tax advisers regarding any potential investment.
Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable
for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such.
Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material,
but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation
or issuance of this material, may from time to time have “long” or “short” positions in, act as principal in, and buy or sell the securities or derivatives thereof of companies
mentioned herein. For the purpose of calculating whether Kotak Securities Limited and its affiliates holds beneficially owns or controls, including the right to vote for directors,
1% of more of the equity shares of the subject issuer of a research report, the holdings does not include accounts managed by Kotak Mahindra Mutual Fund.Kotak Securities
Limited and its non US affiliates may, to the extent permissible under applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior
to or immediately following its publication. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value
or price of or income derived from the investment. In addition , investors in securities such as ADRs, the value of which are influenced by foreign currencies affectively assume
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This report has not been prepared by Kotak Mahindra Inc. (KMInc). However KMInc has reviewed the report and, in so far as it includes current or historical information, it is
believed to be reliable, although its accuracy and completeness cannot be guaranteed. Any reference to Kotak Securities Limited shall also be deemed to mean and include Kotak
Mahindra Inc.

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